Business Context and Reporting Period
Mesa Laboratories, Inc. develops and sells quality-control products and services in regulatory-driven niche markets through four divisions: Sterilization and Disinfection Control, Instruments, Cold Chain Monitoring, and Cold Chain Packaging.
The filing is a Form 10-Q for the quarter and nine months ended December 31, 2018, within fiscal year 2019. The request metadata identifies “2017 Q3,” which does not match the filing period and should be verified.
Financial Performance and Position
| Metric | Three Months Ended Dec. 31 | Nine Months Ended Dec. 31 |
|---|---|---|
| Revenue | $26.682 million, up 13% | $76.689 million, up 11% |
| Gross profit | $15.634 million | $45.302 million |
| Gross margin | 59%, versus 54% | 59%, versus 56% |
| Operating income | $1.320 million | $7.222 million |
| Net income | $0.858 million, or $0.21 diluted EPS | $6.082 million, or $1.51 diluted EPS |
| Net margin | 3%, versus negative 47% | 8%, versus negative 10% |
| Operating cash flow | Not separately provided | $20.292 million |
At December 31, 2018, cash and cash equivalents were $5.729 million. Working capital was $11.778 million, compared with $14.698 million at March 31, 2018. Interest-bearing debt was $29.5 million, consisting of $12.0 million drawn on a revolving credit line and a $17.5 million term loan. The company reported $68.0 million of unused revolving capacity, subject to covenants, and compliance with all debt covenants.
During the nine months, investing activities used $3.825 million, including $4.840 million for acquisitions and $1.207 million for capital expenditures, partly offset by $2.222 million from asset sales. Financing activities used $16.057 million, including $19.125 million of debt repayments, $1.843 million of dividends, and $677 thousand of contingent-consideration payments.
Material Changes Versus the Prior Comparable Period
- Revenue increased $3.011 million for the quarter and $7.391 million for the nine months.
- Gross profit increased 23% for the quarter and 17% for the nine months; consolidated margins benefited from product mix, manufacturing efficiencies, and lower prior-year charges.
- The company moved from a prior-year quarterly net loss of $11.086 million to net income of $858 thousand, and from a nine-month loss of $7.216 million to income of $6.082 million.
- Prior-year results included a $13.819 million impairment charge. The current period included a $3.669 million non-cash impairment charge related to Cold Chain Packaging, comprising $1.028 million of goodwill and $2.641 million of long-lived assets.
- Nine-month results included a $3.300 million estimated legal-settlement expense related to purported TCPA class actions.
- General and administrative expense increased 24% for the quarter and 17% for the nine months, primarily from higher incentive compensation, salaries, and stock-based compensation.
- Debt declined from $46.625 million at March 31, 2018 to $29.5 million at December 31, 2018. A further $3.0 million revolving-credit payment was made after December 2018.
- The company completed the Point Six Wireless acquisition during the quarter and completed its facility relocation and sale of the old Bozeman facility. The facility sale generated a $288 thousand gain.
Outlook, Commentary, Risks, and Unusual Items
- Management described sterilization and disinfection markets as strong and less economically sensitive because products are generally disposable and regulatory-driven.
- Instrument and cold-chain monitoring demand remained solid, but these businesses are more exposed to economic conditions and customer delays in capital spending.
- Management expects to continue investing in sales, marketing, research and development, personnel, infrastructure, and potential acquisitions.
- Cold Chain Packaging margins deteriorated because of substantially higher commodity costs and lower-than-standard pricing under a large customer contract. Management is pursuing price increases but expects margins to remain below those of other segments.
- Management stated that liquidity is strong and sufficient for ongoing business and debt-service needs. The term loan and revolving facility mature or require final repayment in 2022, subject to scheduled amortization.
- Management expects a go-forward effective tax rate of approximately 26%, subject to excess tax benefits and deficiencies from share-based compensation. Actual quarterly tax rates may remain volatile.
- The company accrued $3.300 million for litigation. A preliminary court approval of a $3.300 million settlement was received in January 2019, but the ultimate liability could be greater or less than the accrued amount.
- Foreign-currency translation reduced other comprehensive income by $2.019 million for the nine months. Management characterized overall foreign-currency risk as not material at the filing date.
- The company reported no material changes to previously disclosed risk factors and concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018.
Important Facts for Investors to Verify
- Confirm the intended reporting period because the filing covers December 31, 2018, while the request metadata states 2017 Q3.
- Assess whether Cold Chain Packaging commodity costs and pricing actions can restore margins and whether further impairment charges are possible.
- Verify the final resolution, payment timing, and any additional exposure from the TCPA-related class actions.
- Review the Point Six Wireless acquisition accounting, contribution to revenue and earnings, and remaining integration requirements.
- Reconcile debt repayment plans, covenant headroom, scheduled maturities, and the post-quarter $3.0 million revolving-credit payment.
- Evaluate the sustainability of cash flow and earnings after excluding non-cash impairment, stock-based compensation, amortization, and other unusual items.
- Monitor the effect of the planned lease-accounting adoption, for which the balance-sheet impact was still being assessed.